OPSM 301 Operations Management

Class 5:

Business process flows:

Analysis

Koç University

Zeynep Aksinzaksin@ku.edu.tr

Office Hours

My office hours, slight modification– Mon. 13-15

TA’s office hours– TA: Canan Uckun, IEOM Graduate Student– Tuesday-Thursday 15:30-17:00 ENG 218

My office hours modified– Monday 13:00-15:00

Announcements

First set of study questions Benihana to be discussed on 13/10

Thursday– Read the case, be prepared to discuss– Mini-quiz as part of class participation grade

Kristen’s due 18/10 Tuesday First quiz on 18/10

Example: Focusing Improvement Efforts MBPF operations called for the purchase of both sheet

metal (raw materials) and prefabricated bases (purchased parts). Garages were made in the fabrication area from sheet metal and then assembled with prefabricated bases in the assembly area. Completed garages were stored in the finished goods warehouse until they were shipped to customers

Analyze the firm’s income statement, balance sheet, and cost of goods sold to determine in which department process improvements have the greatest impact on working capital

Definition: working capital

Working capital requirements include the value of inventories in the process and the value of any accounts receivable. Any reduction in working capital reduces the firm’s interest expense and makes extra cash available for other investments.

Consolidated Statements of Income and Retained Earnings

NET SALES 250.0 COSTS AND EXPENSES

– Cost of goods sold 175.8– Selling, general and administrative expenses 47.2– Interest expense 4.0– Depreciation 5.6– Other (income) expenses 2.1– TOTAL COSTS AND EXPENSES 234.7

INCOME BEFORE INCOME TAXES 15.3 PROVISION FOR INCOME TAXES 7.0 NET INCOME 8.3 RETAINED EARNINGS, BEG. OF YEAR 31.0 LESS CASH DIVVIDENDS DECLARED 2.1 RETAINED EARNINGS AT THE END OF YEAR 37.2 NET INCOME PER COMMON SHARE 0.83 DIVIDENDS PER COMMON SHARE 0.21

Consolidated Balance Sheet of Dec. 31, x

Current AssetsCash 2.1Short-term investments at cost 3.0Receivables, less allowances of $0.7 mil 27.9Inventories 50.6Other current assets 4.1TOTAL CURRENT ASSETS 87.7

Property, Plant, and Equipment (at cost)Land 2.1Buildings 15.3Machinery and equipment 50.1Construction in progress 6.7

Subtotal 74.2Less accumulated depreciation 25.0NET PROPERTY, PLANT, AND EQUIPMENT 49.2

Investments 4.1Prepaid expenses and other deferred charges 1.9Other assets 4.0TOTAL ASSETS 146.9

Inventories and Cost of Goods Details

Cost of Goods Sold– Raw Materials 50.1– Fabrications (Labor and Overhead) 60.2– Purchased Parts (Labor and Overhead) 40.2– Assembly (Labor and Overhead) 25.3– TOTAL 175.8

Inventory– Raw Materials (roof) 6.5– Fabrications WIP (roof) 15.1– Purchased Parts (base) 8.6– Assembly WIP 10.6– Finished goods 9.8– TOTAL 50.6

Process Flows

Raw materials

Purchased Parts

Fabrication

Assembly Finished goods

$50.1/yr

$40.2/yr

$60.2/yr $25.3/yr

$6.5 $15.1 $110.3/yr

$8.6$40.2/yr

$10.6 $9.8

$175.8/yr

Detailed look at Inventories and Flow times

Raw materials Fabrication

Purchased parts

Assembly Finished goods

$6.5 $15.1

$8.6

$10.6 $9.8$175.8/yr

$60.2/yr $25.3/yr

$50.1/yr

$40.2/yr

6.75 week 7.12 week

3.14 weeks 2.90 weeks

11.12 weeks

110.3/yr

Inventory Value Representation

CT (week)

TH (mil/week)

Purchased PartsRaw

materials

Fabrication Ass

embl

y

Fin

ishe

d go

ods

Acc

ount

s R

ecei

vabl

e11.12 6.75 7.12 3.14 2.90 5.80

0.77

0.96

2.12

3.38

5.0

Operational Measure: Flow TimeDriver: Activity Times, Critical Activity

(Theoretical) Flow Time

Critical Activity

Flow Time efficiency = TimeFlowAverage

TimeFlowlTheoretica

Industry Process AverageFlow Time

TheoreticalFlow Time

Flow TimeEfficiency

Life Insurance New PolicyApplication

72 hrs. 7 min. 0.16%

ConsumerPackaging

New GraphicDesign

18 days 2 hrs. 0.14%

Commercial Bank ConsumerLoan

24 hrs. 34 min. 2.36%

Hospital Patient Billing 10 days 3 hrs. 3.75%

AutomobileManufacture

FinancialClosing

11 days 5 hrs 5.60%

Most time inefficiency comes from waiting: E.g.: Flow Times in White Collar Processes

Critical Path & Critical Activities

Critical Path: A path with the longest total cycle time.

Critical Activity: An activity on the critical path.

A B

C

D

X-Ray Service Process

1. Patient walks to x-ray lab 2. X-ray request travels to lab by messenger 3. X-ray technician fills out standard form based on info. From

physician 4. Receptionist receives insurance information, prepares and

signs form, sends to insurer 5. Patient undresses in preperation of x-ray 6. Lab technician takes x-ray 7. Darkroom technician develops x-ray 8. Lab technician checks for clarity-rework if necessary 9. Patient puts on clothes, gets ready to leave lab 10. Patient walks back to pysicians office 11. X-rays transferred to physician by messenger

Example 4.5

32

1

4 765

11

109

start end

25%

75%7

20 6

5 3

6 12 2

20

3 7

transport

support

Value added

decisionMeasured actual flow time: 154 minutes

8

Levers for Reducing Flow Time

Decrease the work content of critical activities

– work smarter

– work faster

– do it right the first time

– change product mix

Move work content from critical to non-critical activities

– to non-critical path or to ``outer loop’’

Reduce waiting time.

Operational Measure: CapacityDrivers: Resource Loads

(Theoretical) Capacity of a Resource

Bottleneck Resource

(Theoretical) Capacity of the Process

X-Ray revisitedResource Pool

Res. Unit Load

Load Batch

Theoretical Capacity of Res. unit

No of units in pool

Theoretical capacity of pool

Messenger 40 min/patient

1 1.5 patients/hr

6 9 Patient/hr

Receptionist 5 1 12 1 12

X-ray technician

16 1 3.75 4 15

X-ray lab 7.5 1 8 2 16

Darkroom technician

15 1 4 3 12

Darkroom 15 1 4 2 8

Changing room

6 1 10 2 20

Utilizations given an observed throughput of 5.5 patients/hr

Resource pool Theoretical capacity

Patients/hr

Capacity utilization

Messenger 9 61.11

Receptionist 12 45.83

X-ray technician 15 36.67

X-ray lab 16 34.38

Darkroom technician 12 45.83

Darkroom 8 68.75

Changing room 20 27.50

Levers for Increasing Process Capacity

Decrease the work content of bottleneck activities– work smarter– work faster– do it right the first time– change product mix

Move work content from bottlenecks to non-bottlenecks– to non-critical resource or to third party

Increase Net Availability– work longer– increase scale (invest)– increase size of load batches– eliminate availability waste

Increasing Process Capacity in the Smiley Factory

Focus on the bottleneck– “ensure the bottlenecks’ time is not wasted”

• increase availability of bottleneck resources

• eliminate non-value added work from bottlenecks

– reduce/eliminate setups and changeovers

• synchronize flows to & from bottleneck

– reduce starvation & blockage

– “ the load of the bottlenecks (give it to non-bottlenecks)”

• move work from bottlenecks to non-bottlenecks

• need resource flexibility

– unit capacity and/or #of units.

• invest

The role of variability

6/hr 6/hr

4 or 8/hr 4 or 8/hr

2 or 10 2 or 10

0 or 120 or 12

As variability increases, throughput (rate) decreases

Compounding effect of variability and unbalanced task times

6/hr 4/hr

4 or 8/hr 2 or 6/hr

2 or 10 0 or 8

4/hr

3.5/hr

2.5/hr

Summary of fundamental process principles

identify and eliminate bottlenecks reduce as much variability as possible eliminate handoffs, improve

communication to minimize resource interference